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One of the perks of a new year is that it marks a fresh start for everything, including how we manage our finances. For a large portion of working professionals who actively make investments, how to save tax still remains a mystery. As an investor, all the salaried and non-salaried taxpayers look for tax-saving options to reach an optimum level of income.
If you're a workaholic or have problems understanding the sophisticated language used by the income tax department to explain exemptions and deductions, you've got some help! By the end of this article you'll understand how you can save up on that hefty tax amount.
The importance of Section 80C of the Income Tax Act for saving tax is nonpareil. Investments under ELSS, tax-saver FDs, PPF, EPFs, etc. offer high returns with minimal tax-burden. Let's discuss the various types of investments which fall under Section 80C.
Under Section 80C, ELSS investments are considered to be the best tax saving option mainly because they offer the dual benefit of high returns and high tax savings. ELSS or Equity Linked Savings Scheme is an equity-cum-tax saving plan which bears the returns of equity and offers high tax savings simultaneously.
You can save up to INR 46,000 through this channel by serving the lowest lock-in period of three years. Historically, ELSS is known to have generated higher returns as compared to traditional financial instruments like NPS, FDs and PPFs. The interest earned through investment in ELSS is partially taxable.
Tax Saver Fixed Deposit is a variant of Fixed Deposit that helps the investor in saving more tax as compared to a conventional fixed deposit. You can invest in a tax saver fixed deposit to avail the tax deductions applicable under Section 80C. Tax-saver FDs are just like regular FDs, but they come with a lock-in period of 5 years. You can claim a maximum tax break of 1,50,000 through this channel.
PPF (Public Provident Fund) is one of the most commonly known types of investments. These are long-term investments backed by the Indian Government, usually with a lock-in period of 15 years. One of the major benefits of investing in PPFs is that the interest earned through PPF is not taxable. So, you can bag all the interest earned from your PPF and head for a long vacation to the moneyland; cha-ching!
EPF or Employee Provident Fund is a retirement benefits scheme which can be availed by all salaried employees. EPF amounts to 12% of basic salary + Dearness Allowance, which is deducted by an employer and deposited in EPF. The interest earned on EPF is entirely tax-free. However, the amount can be withdrawn after five years of continuous service.
The Indian Government introduced NPS or National Pension Scheme for assisting the unorganized sector and self-employed working professionals in getting pension post-retirement. Investments made by the employer are tax-free.
ULIPs are a great blend of investment and insurance. A share of the invested amount in ULIPs is used to offer insurance coverage and the remainder is invested in the stock market. If you invest up to 1,50,000 INR under ULIPs, you'll be eligible for a tax break under Section 80C.
The Indian Government has also introduced the Sukanya Samriddhi Yojana. This scheme aims at helping women in the country. Since the program was spearheaded by the Indian Government, interest earned on investments, withdrawals and maturity amount are tax-free.
Other Tax Deductions applicable under Section 80C are:
Life Insurance Premium paid by an individual, spouse or their dependent children
Senior Citizen Savings Scheme
Bank Deposits or Post Office Deposits that are more than 5-Years old
Payment made towards the tuition fees of kids
Principal payment made towards home loan.
Payment made towards the Stamp duty and registration of a house
This section mainly deals with the tax deductions on the medical insurance premiums paid. There's an additional exemption of up to INR 5,000. The Budget declared in 2018 proposed to raise the deduction for senior citizens from INR 30,000 to 50,000. Directions for availing deduction under Section 80D:
The payment should be made from the taxable income
The payment should not be made in cash
Student loans are one of the primary ways of financing education abroad. If you're someone planning on taking a student loan for studying in India or abroad, you can claim deduction under Section 80E. Interest on student loan can be claimed for deduction.
This deduction can be availed for an education loan taken for yourself or any of your relatives. The whole interest amount is deductible in the year in which the individual starts paying interest on the loan. However, the interest must be paid from the taxable income.
Under this section, home buyers who have taken a loan can claim an additional tax deduction of up to 50,000 on the home loan interest payments. However, the borrower must satisfy the following conditions for availing deductions under section 80EE
The home loan must be taken for the acquisition of a property
The loan should be sanctioned after 2016-17
The total amount of loan taken shouldn't exceed 35 lakhs
This section covers the donations to some approved funds and trusts, charitable institutions. Such deductions can be claimed only when the contribution is made through cheque or Demand Draft. Contributions such as clothing, food material, medicines, etc. don't qualify for deduction under this section. Under Section 80GGC, you can claim for the donations made to any political parties.
This section applies to employees who don't avail the benefits of HRA or any other form of deductions under any other section on their rent. You can make a claim for tax deduction if you haven't claimed allowance under HRA or any other section of the Income Tax Act.